Question
A bank has decided to extend a $1 million loan to a commercial client. The bank has a listed prime rate of 7%. The bank
A bank has decided to extend a $1 million loan to a commercial client. The bank has a listed prime rate of 7%. The bank has estimated that the marginal cost of raising funds is 4.75%, and their non-funds operating cost is 0.25%. The bank desires a profit margin of 2% on their loans. The bank wants a default risk premium on the loan of 1.5%. They have also estimated that the loan's term risk premium is .5%. What is the interest rate this bank will charge on this loan if they use the price leadership model?
A. | None of the other responses are correct | |
B. | 9% | |
C. | 11% | |
D. | 7% | |
E. | 9.25% |
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